Filing for protection from creditors could come back to haunt planners; sanctions, revoking of CFP mark possible
Certified financial planners will soon get a warning from the organization that grants their credentials to beware of declaring bankruptcy.
Over the last year, the Certified Financial Planner Board of Standards Inc. has noticed a sharp increase in the number of bankruptcy cases that come before its Disciplinary and Ethics Commission.
The numbers tell the tale: In 2010, bankruptcy cases accounted for 20 of the CFP Board's 103 disciplinary hearings. The number of bankruptcy cases jumped to 49 in the 134 hearings conducted this year.
Overall, the CFP Board has been putting a greater emphasis on policing its mark holders. The total number of investigations the organization has conducted rose from 831 in 2008 to 1,472 in 2010.
Beyond the obvious ignominy of a certified financial planner's going broke, a CFP can face a range of official sanctions — from a private censure to revocation of the CFP mark — for filing bankruptcy within the last five years.
Two or more bankruptcies over any timeline disqualifies a planer for certification. A first-time CFP applicant who has filed for one bankruptcy must get approval for certification from the DEC.
The CFP Board will reiterate the consequences of bankruptcy in an upcoming publication it sends to mark holders. “We are working on guidance in a newsletter to all CFP professionals on the impact of filing for bankruptcy on CFP certification,” said Michael Shaw, CFP Board managing director for professional standards and legal. “I do think some will think twice before filing.”
The CFP Board, which grants the CFP certification and upholds related ethical standards, believes that a bankruptcy can reflect poorly on a CFP mark holder's integrity and fitness to provide investment advice. There are about 62,000 CFPs in the United States.
Even if a CFP goes under once, it doesn't mean automatic end to certification. The disciplinary board has some leeway. “Every bankruptcy has mitigating factors taken into account,” Mr. Shaw said.
When assessing a bankruptcy, CFP Board evaluates whether there were unavoidable circumstances, such as a health condition or a divorce, that contributed to the failure of the planner's business.
The organization also assesses whether clients have been hurt. For instance, in 2009, a CFP professional got a client involved in a real estate investment company that went belly up, wiping out the total value of the planner's and client's investments.
“In this case, the [disciplinary board] found that CFP professional had not properly evaluated the investment in the real estate development company before arranging the meeting with his client,” Mr. Shaw wrote in an e-mail. The planner agreed to a three-and-a-half-year suspension of his right to use the CFP mark.
Bankruptcy isn't always linked to incompetence or malfeasance. Some of the increase in CFP bankruptcies can be attributed to the deep recession that followed the financial crisis of 2008, according to Mr. Shaw. “We're still struggling along with this economy,” Mr. Shaw said. “I would think the number of bankruptcies will hold pretty steady this year.”
The CFP Board also has been cracking down on financial planners who misrepresent their products or services. The disciplinary panel reviewed 50 such cases between 2008 and 2010, putting this category just ahead of disclosure and bankruptcy.
“The increase in this type of conduct is due, in part, to process improvements made by the CFP Board over the last few years that allow the staff to quickly identify and prioritize the more serious allegations, in particular those involving conduct that directly impacts clients,” Mr. Shaw noted.
